Answer to Question #130145 in Economics of Enterprise for Anish Yadav

Question

Suppose the home economy was initially at the long run equilibrium. The consumption in the country depends on the disposable income, Y-T, C = C(Y-T), and the investment depends on the interest rate of the country, i, I = I(i). Assume the home country follows a floating exchange rate system. Now, there is an increase of foreign income.

Following the increase of the foreign income, the central bank of home country changes the money supply to maintain the output at the initial level. Use the IS-LM-FX model to explain (in words) the short run effects of this policy. Be sure to explain

(i) movements (shifts) of all curves starting from the short run equilibrium after the increase of the foreign income but before the policy implementation including

(ii) the reasons for the shifts, and

Answer 1

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